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Why Did Saudi Arabia Ditch Petro-Dollar?



The financial world is abuzz with anticipation following Saudi Arabia’s groundbreaking decision not to renew its 50-year petro-dollar agreement with the United States.


The agreement, which had been in place since 1974, allowed Saudi Arabia to exclusively sell oil and other goods in US dollars. However, this recent move signifies a major shift away from the petrodollar system and has significant implications for global finance.

 

In 1972, the United States decoupled its currency from the gold standard, leading to the establishment of the petrodollar system. Under this arrangement, oil-producing countries, particularly those in the Middle East, agreed to price and sell their oil exclusively in US dollars. In return, the US provided military protection and economic cooperation.

 

Saudi Arabia’s decision not to renew the petro-dollar contract opens up new possibilities. Instead of relying solely on the US dollar, it can now sell oil and other goods in multiple currencies, including the Chinese RMB, Euros, Yen, and Yuan. Additionally, the potential use of digital currencies like Bitcoin is also on the table.

 

In a further move away from the petrodollar, Saudi Arabia has announced its participation in Project mBridge. This ambitious project explores a multi-central bank digital currency (CBDC) platform shared among participating central banks and commercial institutions. Built on distributed ledger technology (DLT), mBridge aims to enable instant cross-border payment settlements and foreign exchange transactions.

 

Project mBridge boasts over 26 observing members, including the South African Reserve Bank, which recently joined. Other notable participants include the Bank of Israel, Bank of Namibia, Bank of France, Central Bank of Bahrain, Central Bank of Egypt, Central Bank of Jordan, European Central Bank, the International Monetary Fund, the Federal Reserve Bank of New York, the Reserve Bank of Australia, and the World Bank.

 

Saudi Arabia’s petro-dollar exit represents a paradigm shift in global finance. The world watches closely as the kingdom explores new avenues beyond the traditional petrodollar system, potentially reshaping the future of international trade and currency dynamics.

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